Shriram Transport Finance Subsidiaries witness sharp increase in NPA

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1 Shriram Transport Finance Subsidiaries witness sharp increase in NPA Shriram Transport Finance s (STFC) standalone performance was broadly in-line with our expectation but grossly disappointed on asset quality front in its equipment finance subsidiary. GNPA ratio of Shriram Equipment Finance increased to 15.7% in 4QFY15 v/s 2.9% in 3QFY15 as the company classified Rs4bn of equipment loans to NPA during the quarter. As a result, Shriram Equipment Finance declared a loss of Rs2bn in FY15 v/s profit of Rs868mn in FY14. Consequently, net worth of the company got wiped off and parent infused additional Rs1bn as equity in the equipment finance subsidiary. Further, management has indicated that another Rs4bn of loan in equipment finance subsidiary is 150 day overdue and may be declared NPA in coming quarters. Management has also indicated that recovering these loans are bit tough due to specialized usage of these equipments. Although, contribution of equipment finance subsidiary in the group s overall AUM is ~5%, but it will remain a drag on the stock performance in the coming few quarters. Hence, we downgrade the stock to HOLD. Standalone performance remained healthy Standalone performance of the Shriram Transport Finance was broadly in line with our expectation as PAT increased 7.4% yoy and 1.4% qoq on account of sturdy progress in NII and lower operating expenditure. NII witnessed strong growth (+48.8% yoy; +3.2% qoq) led by healthy growth in AUM and control over slippages. Asset quality in standalone business was arrested as management continued to focus on improving collections. Pickup in core business segment The company witnessed healthy growth in disbursement led by improvement in used CV demand during the quarter. AUM for pre-owned segment increased to Rs537bn, a growth of 15.4% yoy and 4.1% qoq. However, AUM growth in new CV segment remained muted (-25.1% yoy; -2.2% qoq) due to higher repayment. Share of pre-owned vehicle in overall AUM increased to 92% from 88% in Mar 14 and 91.5% in Dec 14. Pickup in the CV demand and improving macroeconomic scenario provide ample room for recovery in growth trajectory. Management has guided a 12-15% growth in loan book in FY16E. Margins improved sequentially Moderation in incremental cost of fund aided STFC to improve standalone margin by 21bps yoy and 3bps qoq to 6.7%. Control over fresh slippages also helped to lower interest reversals further supporting margins during the quarter. This along with healthy growth in AUM helped the company to post strong NII. Going forward, we believe margins to improve further led by drop in corporate bond yield, likely downward revision of base rate by banks and higher upgrades & recovery from NPA. Bank loan contributes 67% of the total borrowing and ~50% of these loans are linked to base rate. Outlook and Valuation Despite the gradual improvement in the core business, we expect Shriram Transport Finance to underperform the broader market due to dismal performance of its equipment finance subsidiary. Although, contribution of Shriram Equipment Finance Ltd in overall AUM was mere 5% but the poor asset quality would remain a big drag on the overall performance. Hence, we downgrade the stock to HOLD with a revised Target Price of Rs1,016. HOLD CMP*(Rs) 970 Target Price (Rs) 1,016 Upside/ (Downside) (%) 5 Bloomberg Ticker SHTF:IN Market Cap. (Rs bn) 220 Free Float (%) 75 Shares O/S (mn) Shareholding Pattern (%) Dec 14 Mar 15 Promoter FII DII Others (Rs mn) FY15 FY16E FY17E NII 33,750 45,274 55,935 Other Inc. 7,379 7,438 7,672 PPP 31,054 42,676 51,916 Net Profit 12,378 16,238 20,065 EPS (Rs) ABV (Rs) FY15 FY16E FY17E P/ABV (x) P/E (x) GNPA (%) NNPA (%) Avg. ROA (%) Avg. ROE (%) Year Relative Price Performance May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 NIFTY CNX Bank Shriram Transport Finance Note: * CMP as on April 30, 2015 Research Analyst: Asutosh Kumar Mishra Contact: (022) asutosh.mishra@relianceada.com P a g e 1

2 Exhibit 1: Income Statement Analysis (Rs mn) 4QFY15 4QFY14 % yoy 3QFY15 % qoq FY15 FY14 % yoy Interest Income 21,364 16, , ,779 62, Interest expended 11,886 10, , ,029 38, Net Interest Income 9,478 6, , ,750 23, Net Income from Securitisation 1,376 2,756 (50.1) 1, ,379 12,796 (42.3) NII including Securitisation Income 10,854 9, , ,129 36, Other fee based income 3 4 (26.8) 3 (9.1) (45.7) Operating Income 10,857 9, , ,141 36, Operating expenditure 2,991 2, , ,783 9, PPP 7,866 6, , ,359 26, Other Income (34.1) ,634 (57.5) Operating Profit 8,023 6, , ,054 28, Provisions for Bad Debts 3,234 2, , ,331 10, Provisions against Standard Assets 6.9 (35.4) (119) (94) PBT 4,782 4, , ,424 18, Tax 1,615 1, , ,046 5, PAT 3,167 2, , ,378 12,642 (2.1) EPS (Rs) (2.1) Source: Company, RSec Research Exhibit 2: Balance Sheet Analysis (Rs mn) 4QFY15 4QFY14 % yoy (bps) 3QFY15 % qoq (bps) AUM Analysis On Books (mn) 492, , , Off Books (mn) 98, ,284 (40.6) 80, Total AUM (mn) 591, , , New CVs 46,802 62,499 (25.1) 47,845 (2.2) Pre-Owned CVs 537, , , AUM 584, , , Gross NPA (mn) 18,941 14, , Gross NPA (%) (7) Net NPA (mn) 3,791 3, , Net NPA (%) (5) NIM (%) C/I Ratio (%) Interest Covr. Ratio (%) (2) 2.0 (2) Tier I Ratio (%) (126) 16.5 (6) Total CAR Ratio (%) (696) 21.1 (464) Source: Company, RSec Research P a g e 2

3 Profit and Loss Statement Y/E March (Rs mn) Interest Earned 44,971 62,664 77,779 93, ,222 Interest Expenditure 28,492 38,982 44,029 48,404 48,287 Net Interest Income 16,479 23,683 33,750 45,274 55,935 Net Income from Securitization 18,057 12,796 7,379 7,438 7,672 Other Income 1,885 1, Net Operating Income 36,421 38,134 41,836 53,458 64,393 Core Operating Income 34,536 36,479 41,129 52,713 63,607 Employee Expenses 3,898 4,089 4,296 4,661 5,244 Other Expenses 3,910 5,472 6,487 7,816 9,458 Operating Expenses 7,808 9,561 10,783 10,783 12,478 Operating Profit 28,613 28,573 31,054 42,676 51,916 Provisions and Contingencies 8,451 10,293 12,630 18,619 22,189 Profit Before Tax 20,162 18,280 18,424 24,056 29,727 Taxes 6,556 5,638 6,046 7,818 9,661 Profit After Tax 13,606 12,642 12,378 16,238 20,065 Balance Sheet Y/E March (Rs mn) Equity & Liabilities Capital 2,269 2,269 2,269 2,269 2,269 Reserves Total 69,675 80,463 90, , ,800 Net Worth 71,944 82,732 92, , ,069 Long term borrowings 190, , , , ,153 Other Long term Liabilities 12,976 9,870 9,713 10,345 11,431 Long Term provisions 11,347 12,717 15,865 17,531 18,144 Current Liabilities 157, , , , ,065 Total Liabilities 444, , , , ,862 Assets Fixed Assets 601 1,007 1,007 1,088 1,148 Non-current investments 5,923 6,878 11,143 13,371 15,845 Deferred tax assets 2,838 2,512 2,565 2,590 2,616 Long term loans and advances 194, , , , ,994 Other Non Current Assets 1, ,006 1,111 Non-current assets 205, , , , ,714 Current Investments 29,766 20,375 22,129 23,900 26,289 Cash and cash equivalents 63,193 70,860 47,234 52,194 57,674 Short term loans and advances 144, , , , ,409 Other current assets Current assets 238, , , , ,149 Total Assets 444, , , , ,862 P a g e 3

4 Per Share Data and Valuation No. of Shares Earnings Per Share (Rs) Book Value / Share (Rs) ABV/Share (Rs) Dividend Per Share (Rs) Price/ Earnings (x) Price/ ABV (x) RoA Tree Analysis Interest Income / Avg Assets Interest Expenses / Avg Assets NII / Avg Assets Other Income / Avg Assets Operating Income / Avg Assets Employee Exp as % Net Operating Income Employee Exp. / Avg Assets Office & Admin as % Net Operating Income Office & Admin / Avg Assets Cost to Income Ratio Opex / Avg. Assets Depreciation / Avg. Assets Credit Cost NPA Provisions as % NOI NPA Prov. / Avg. Assets PBT / Avg. Assets Effective Tax Rate Tax / Avg. Assets RoA Leverage Ratio RoE P a g e 4

5 Growth Ratio yoy (%) Net Worth Loan Book Borrowings Total Assets / Liability Total Working Assets Total Working Fund (WF) Net Interest Income Other Income 46.8 (12.2) (57.3) Employee expenses Operating Expenses Loan losses and Provisions Profit Before Tax 7.2 (9.3) Taxes 5.2 (14.0) Net Profit 8.2 (7.1) (2.1) Yields / Margins (%) Cost of Fund - CoF Yield On Fund - YoF Net Interest Margin Spread Asset Quality (%) Gross NPA Ratio Net NPA Ratio PCR Credit Cost P a g e 5

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